It would be interesting to play the normal game in co-op using two nomads for sure. It would get rid of the water issue. only thing with the actual game that would need modification (aside for the link cable code) would be to enable tails to smash monitors, activate switches and the like. Would be fun.

Actually, you need to ensure they stay in sync if one of them slows down for whatever reason (not to mention that eventually they will go out of sync because oscillators aren't perfect). Also, since you have two separate consoles, you may as well modify the object manager to let them handle two completely different set of objects when players are far enough from each other.

EDIT: also the fact that even if the oscillators were perfect, you can't know what is each VDP doing. One of them could be in vblank while the other could be in the middle of the screen, for example =P

If it hasn't been mentioned, why not a hack that completely re-designs 2P vs mode from scratch [or near scratch] so instead of working with the existing system, you [whoever that would be] would be making a new system that could fully take advantage of, push the Megadrive hardware to the limit?